With decades to go before retiring, one reader seeks a second opinion on whether he can take more risk.
I’m 28 years old and my workplace pension is invested in the default fund, Aviva Diversified Assets II. I’m happy to take more risk and I’d like to see if I could do better. I’ve picked four funds – BlackRock 50:50 Global Equity Index Tracker, Old Mutual UK Mid Cap*, Artemis Global Growth and Man GLG Japan CoreAlpha. Is this a good idea?
Initial diagnosis
Switching out of your pension’s default fund is regarded as a good move by the experts.
“At age 28, you have a long time until you will be taking your pension benefits so, if you are comfortable with it, you can afford to take a high degree of investment risk,” says Patrick Connolly, certified financial planner at Chase de Vere. “If your investments fall in value, you have plenty of time to claw back any losses.”
He adds that the default fund, Aviva Diversified Assets II fund, holds around 60% in shares and most of the rest in fixed interest and cash. “This is a medium-risk fund designed to manage risks,” he says. “You can afford to put more into the stock market.”
Health check
Your selection of funds offers much more exposure to equities, with Joshua Gerstler, financial adviser at The Orchard Practice, pointing out positives on all three of the actively managed funds.
“Putting a portion of your portfolio into each of the funds will give you exposure to most of the developed market regions, with deep-dive expertise coming from the Old Mutual UK Mid Cap and the Man GLG Japan CoreAlpha funds,” he explains.
Your choice of an index tracker, the BlackRock 50:50 Global Equity fund, receives mixed reactions though.
Mr Gerstler prefers the active management approach.
“While cheap, with an ongoing charge of just 0.02%, an index tracker might not be the best option considering where we are in the market cycle,” he says.
Global stock markets ended 2017 on record highs, while in January 2018 London’s FTSE 100 index and the main US stock market indices, the Dow Jones and the S&P500 hit new highs. However, by early February, the fi nancial markets had started to plunge.
“You might want to stick to active managers for now to provide a buffer against potential downturns,” says Mr Gerstler.
But Jason Witcombe, chartered financial planner at Evolve Financial Planning, is happy to go for an index tracker.
“Costs make a big difference when compounded over a multi-decade investment term,” he explains. “Actively managed funds typically cost more than index trackers.”
For example, with your selection, the three active funds have ongoing charges of between 0.9% and 1.6%.
Treatment recommendations
While the experts are happy with your choice of funds, they offer some suggestions to enhance your investment strategy.
“You might want to consider adding a fund specialising in another asset class, such as corporate bonds or property,” says Mr Gerstler. “These offer decent return prospects, but are lower risk than equities and will provide a parachute of sorts in a wider market fall.”
Mr Witcombe suggests another approach too, focusing on keeping charges to a minimum.
“If you have access to the BlackRock UK Equity Index Tracker and the BlackRock World (ex-UK) Equity Index Tracker, you could combine these, or similar funds, to give you a low-cost, globally diversified portfolio with a home bias,” he explains. “Then you could add in extra exposure to certain areas – for instance, a Japan fund if you wanted to make a bet on it outperforming other regions.”
However you decide to invest, Mr Connolly recommends monitoring your funds regularly to ensure they are performing as expected.
* Denotes a Moneywise First 50 Fund for beginner investors. For Moneywise’s recommendations for corporate bonds and property funds, visit www.moneywise.co.uk/first-50-funds.
Do you have a question for the Investment Doctor? Email editor@moneywise. co.uk
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